Alabama Taxpayers' Bill of Rights II Passes Easily In House; Other Important Tax Bills of Interest

On April 4, Birmingham attorney and State Representative Paul DeMarco led the effort to pass the 2013 version of the Alabama Taxpayers’ Bill of Rights II, HB 264. The House of Representatives voted 96-2 in favor of the bill. It now goes to the Senate, whose Fiscal Responsibility & Accountability Committee has already passed a similar version of the bill sponsored by Prattville/Montgomery attorney and Senator Bryan Taylor. Readers may recall that a previous version of the bill was passed near unanimously during the 2012 legislative session but was pocket vetoed by Governor Robert Bentley due to last minute technical glitches in the bill that mistakenly deleted some of his requested amendments. The Governor’s office has indicated that he supports the revised version.

This landmark legislation reflects the work of members of the Alabama State Bar Tax Section in cooperation with the Alabama Society of CPAs (ASCPA) and the Alabama Department of Revenue (ADOR) over the past decade. To date, the Alabama State Bar, the 30-member Business Associations’ Tax Coalition, the Business Council of Alabama, the ASCPA, the Council On State Taxation (COST), the Tax Executives Institute, the American Bar Association, and, most recently, the American Institute of CPAs, have endorsed this bill.

The bill creates the Alabama Tax Appeals Commission (ATAC) by abolishing the current Administrative Law Division of the ADOR and transferring both its personnel and equipment to a newly formed state agency under the executive branch. Alabama is now in the minority of states that lack an independent tax appeals tribunal, and it received a “D” on COST’s latest State Tax Due Process Scorecard primarily for this reason. The ATAC provisions essentially track the ABA’s Model State Administrative Tax Tribunal Act, except that appeals from the ATAC will continue to be filed with the circuit courts and tried on a de novo basis.

In addition to handling all ADOR-administered taxes other than ad valorem property tax assessments, the bill would allow taxpayers to appeal final assessments of sales, use, rental, and lodgings taxes issued by self-administered cities and countries (and their private auditing firms) to the ATAC unless the governing body of the city or county opts out. This provision represents a major step toward addressing the frustration of the business community and tax advisers with the differing interpretations and appeals procedures of the many self-administered localities or their contract-auditing firms.

Major changes were made to the ATAC judge selection process at the request of the Governor. Now, the nominating committee develops a list of five nominees and the governor must select one of them or reject all five and ask for a new slate. Once he or she selects a nominee, it is final. Unlike previous versions of the bill and the ABA Model Act, there is no requirement of Senate confirmation.

Except in limited instances, the bill extends the period during which the taxpayer can appeal both a preliminary and final assessment from 30 days to 60 days after issuance of the assessment. The ADOR’s legal division is also given 60 days to file its answer with the ATAC, plus a 30-day extension if requested.

HB 264 clarifies that the failure-to-pay penalty of 1 percent per month, which was included in the 2009 film incentives legislation, applies to the “correct” amount of tax required to be shown on a return, only begins to accrue 30 days after the first written notice and demand, and only applies to the “net” amount of underpaid tax. Additionally, the bill clarifies that neither failure-to-pay penalty will apply to estimated tax payments, consistent with federal law.

The bill clarifies that taxpayers have the option to appeal to the ATAC any proposed adjustments by the ADOR to their net-operating-loss carryovers.

At the request of the ADOR, HB 264 increases the penalty amounts for negligence, fraud, frivolous tax returns, and frivolous appeals to the ATAC to more closely conform to current federal law.

At the request of the ADOR, the bill amends the revenue agent’s report (RAR) statute regarding assessments and refund claims resulting from IRS audit changes. The statute of limitations on assessments may not close until the taxpayer files an amended return and reports the IRS audit adjustment. Taxpayers would be required to file the amended return within 6 months after a final determination of their federal tax liability (they have one year under current law). However, taxpayers will continue to have one year after the grant of an IRS refund to file an equivalent refund claim with the ADOR. This provision is based on the Multistate Tax Commission’s model RAR act.

The bill conforms to two intervening changes to the “innocent spouse” rules under the Internal Revenue Code to expand the scope of this defense for spouses who filed a joint return.

The bill automatically nullifies any preliminary assessment that has been outstanding more than five years as of October 1, 2013 (i.e., issued prior to October 1, 2008), unless it is withdrawn before that date, a final assessment is issued thereon, or the parties agree to extend the time period. For any other preliminary assessment, the taxpayer has the option to appeal the preliminary assessment to the ATAC or appropriate circuit court if assessment has been dormant for three or more years.

Finally, the bill requires the Taxpayer Advocate to contact the taxpayer or his/her representative before issuing a denial of their request for an interest abatement or waiver of penalties. It also grants authority to the Taxpayer Advocate to review and correct a final order of the ATAC if the judge so requests and if there is newly discovered evidence that indicates the taxpayer was incorrectly assessed.

House Bill 140 – Tax Credit for Preservation of Historic Structures Passes House 101-0: HB 140 would provide a tax credit against the tax liability of the taxpayer-owner for the rehabilitation, preservation, and development of historic structures. The credit for the taxable year in which the certified rehabilitation is placed in service would be equal to 25 percent of the qualified rehabilitation expenditures for certified historic structures, and shall be 10 percent of the qualified rehabilitation expenditures for qualified pre-1936 non-historic structures. The credit would apply to business privilege taxes, financial institution excise taxes, income taxes, insurance premium taxes, and utility taxes. This bill has passed out of the House and has been assigned to the Senate Ways and Means-Education Fund Committee. It is being championed by a coalition of chambers of commerce and downtown redevelopment groups around the state, including the Birmingham Business Alliance.

Government Contractor Sales and Use Tax Exemption Bill, HB 419, Passes House 89-6: On Tuesday, April 9, the House passed a bill sponsored by Representative Paul DeMarco (among others) and championed by the Associated Builders & Contractors. The proposed legislation covers construction projects involving governmental entities exempt from sales/use taxes. The bill would change existing law, which is itself the result of the 2004 repeal of the so-called Government Contractor Exemption Act, Ala. Code § 40-9-33. Current law requires that (1) the prime contractor and subcontractors be appointed in writing as the purchasing agents of the government entity and (2) only the government owner’s funds be used to purchase the construction materials subject to the exemption. Suffice to say, administrative nightmares and cash flow problems abound with the current process. So do financially devastating traps for the unwary contractor or subcontractor.

The bill would essentially be a return to the pre-2004 conditions, allowing the Alabama Department of Revenue to grant certificates of exemption from sales and use taxes to contractors and subcontractors licensed by the State Licensing Board for General Contractors for the purchase of building materials and construction materials to be used in the construction of most government projects (not including a highway, road, or bridge project). The bill would provide for the accounting for purchases and for strict enforcement of violations. We commend Commissioner of Revenue Julie Magee and her staff for working with the contractor community on this long-awaited legislation.

Note: Members of our SALT Practice Team were involved in drafting and lobbying for TBOR II.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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